Secured credit cards are an excellent financial tool for individuals with poor or no credit history. They provide an opportunity to rebuild or establish a credit score over time, enabling users to access credit and gradually improve their financial health. Here’s an in-depth look at secured credit cards available in India, including their benefits, features, eligibility criteria, and essential considerations. Secured credit card are a practical solution for people with poor or no credit.
What is a Secured Credit Card?
A secured credit card is backed by a fixed deposit (FD) that the cardholder makes with the issuing bank. The credit limit on the secured credit card is usually a percentage of the amount invested in the FD, commonly between 80% and 100%. This reduces the risk for the bank and makes it easier for individuals with poor credit scores or no credit history to get approved. Secured credit cards are primarily used for credit-building purposes, offering a way to access credit while ensuring the cardholder can manage it responsibly.
Key Features of Secured Credit Cards
- Credit Limit Based on Fixed Deposit: The credit limit is determined by the fixed deposit amount held with the bank. For example, if you have an FD of ₹20,000, the bank may offer a credit limit ranging from ₹16,000 to ₹20,000.
- Secured by FD: The bank’s risk is lower since an FD secures the card. This provides greater approval chances for individuals with no or poor credit history.
- Reports to Credit Bureaus: Secured credit cards report your usage and repayment history to credit bureaus. If used responsibly, they can be a helpful tool in improving or building a credit score.
- Access to Credit: Secured credit cards offer the convenience of accessing credit without needing a high credit score. This makes them an ideal choice for individuals new to credit or with a low credit score.
- Interest on FD: The FD underlying the secured credit card continues to earn interest, so users benefit from building their credit and earn passive returns on the deposit.
Benefits of Secured Credit Cards
- Credit Score Improvement: One of the primary benefits of using a secured credit card is that it helps improve your credit score. By using the card regularly and making timely payments, you demonstrate your ability to handle credit responsibly, which can positively impact your credit score over time.
- Easy Approval: Secured credit cards are more accessible than unsecured ones, especially for people with poor credit or no credit history. The underlying fixed deposit minimizes the bank’s risk, making it easier to get approved.
- Controlled Spending: Since the credit limit is directly linked to the FD amount, it prevents overspending. This makes secured credit cards a good choice for individuals who must be cautious about their spending habits.
- Financial Flexibility: A secured credit card allows you to use credit for various purchases while also helping to build your credit profile for future financial products like loans or unsecured credit cards.
- Interest Earnings on Fixed Deposit: Unlike unsecured credit cards, the FD backing a secured credit card earns interest. This benefits the cardholder, as their money is still working for them while they improve their credit score.
Eligibility Criteria for Secured Credit Cards
- Age: Typically, applicants must be at least 18 years old and have a steady income source.
- Fixed Deposit Requirement: The applicant must have the funds to deposit a fixed deposit with the issuing bank. This amount will be the primary collateral for the credit card.
- KYC Documentation: The cardholder must provide necessary KYC (Know Your Customer) documents such as proof of identity, address, and income.
- Credit Score: While secured credit cards are designed for individuals with low or no credit score, having a minimal credit history or a low score may still be beneficial during the application process.
Essential Considerations Before Opting for a Secured Credit Card
- Timely Payments: Ensuring timely payments is crucial for improving your credit score. Missing payments or carrying balances from month to month can negatively affect your creditworthiness.
- Credit Utilization: Keeping your credit utilization ratio low (under 30% of the available credit) will help improve your credit score. High utilization can indicate financial stress and may harm your credit score.
- Fees and Charges: Be aware of any fees associated with the card. Some secured credit cards may charge annual, processing, or late payment fees. It’s important to compare these costs across different card offerings.
- Interest Rates: Secured credit cards typically have higher interest rates than unsecured cards. Understanding the interest charges on outstanding balances is crucial to avoid accumulating debt.
- Transition to Unsecured Credit Cards: Once you build a good credit history and improve your score, many banks offer the option to convert a secured credit card to an unsecured one, allowing access to additional benefits like rewards programs, higher credit limits, and exclusive perks.
Adhil Shetty, CEO of Bankbazaar.com, adds, “Secured credit cards are a great tool for rebuilding a poor credit score, but unsecured credit cards offer a wider range of benefits. These can include rewards programs, cashback offers, dining discounts, travel perks, etc. To make the most of these advantages, comparing different credit card options and choosing one that best aligns with your lifestyle and spending habits is important. Timely payments of your dues are significant in the case of both types of cards to keep your financial health intact.”
Conclusion
Secured credit cards provide an excellent opportunity for individuals with poor or no credit history to improve their credit scores and access credit facilities. By maintaining discipline in card usage, making timely payments, and keeping credit utilization in check, cardholders can gradually establish their creditworthiness. Over time, this can lead to eligibility for better financial products, including unsecured credit cards and loans. Read the terms and conditions carefully and monitor your spending and payments to maximize your secured credit card.